Non-competes hinge on 'rational terms'

As we discussed in February, this series is covering issues relatingto non-competition agreements where there are almost always hidden issuesinvolved when a veterinarian agrees to limit the scope or location of hisor her right to practice his or her profession.

As was explained in February, there is no body of state or federal lawwhich lays out the specifics of what is or is not permissible in a non-competitionagreement.

Rather, our system of law relies on parties to agree to rational termsin such contracts. Then, only after the agreement is made and allegedlyviolated, may a court be called upon to determine whether any of the contract'sterms fell outside the limits of enforceability.

In addition, certain terms may be permitted in one part of a state, thenheld unenforceable when similar terms are interpreted elsewhere in the samestate. Unfair? Possibly, but unquestionably legal.

Clarify

In the interest of clarity, let us return to the example used in Februaryin which an associate, Dr. B, agreed in writing not to practice within fivemiles of his former boss, Dr. A. Dr. B built his new clinic six miles awayon the only road between the two sites. Later, Dr. A discovers the buildingsare actually only 4.95 miles from each other "as the crow flies."

1. Reasonable Distance Terms. One of the reasons why our legalsystem doesn't attempt to pass a statute to cover every contingency, (althoughsometimes it seems that way), is that every situation and every contractis a little bit different. In defending the cases in the example, Dr. Bmight allege that among other things, five miles was too restrictive inthe first place; that he was "bullied into" that long distancerequirement and that it would be "against public policy" to enforcesuch a severe limitation on Dr. B's ability to earn a living in his community.

This argument has worked in the past, in some instances. Public policyis considered violated when a contractual term is so restrictive that itwould be unreasonable to permit members of society to agree to such things.For example, people used to donate lands for public parks, but the deedscontained covenants restricting use of the park to certain racial or religiousgroups. Enforcement of such covenants is now routinely denied by courtsas being "against public policy."

As for Drs. A and B, it is unlikely that a five mile restriction wouldbe considered excessive, regardless of location, with the possible exceptionof an agreement covering two clinics in a densely populated city. In interpretingsuch clauses, courts often attempt to get some sense of what a practice'srealistic radius of client base would be. If a non-competition radius forceda doctor out of an entire metropolitan area, it might be considered excessive.

2. Bargaining Strength of Parties. Often, courts are called uponto consider the nature of the parties and their legal sophistication inconstruing a non-competition provision. Keep in mind that it is not onlyindividual doctors or small group practices which enter into non-competitionagreements. Large medical practices and huge medical companies avail themselvesof the protections offered by "non-competes." In doing so, theymay pay large sums of money for those restrictive rights and so may fairlyexpect strict compliance. A court may, however, treat Dr. B differentlyfrom a 150-practice veterinary corporation. So while Dr. B may realisticallyallege that he didn't have the resources for a thorough legal review ofhis non-compete to explore every remote eventuality, a similar claim bySuperVetCo Inc. might fall on deaf ears.

3. Ambiguity. Drs. A and B would not be the first pair of veterinarianswho got into trouble acting as their own attorneys. Veterinarians and plentyof others do this all the time. Consequently, there has developed a doctrinein many jurisdictions which places the onus for contractual specificityon the party who actually writes or drafted the document in dispute. Simplystated, the law often construes any ambiguity in a contract against thedrafting party. This is a way to discourage people like Dr. A from failingto define what the "five miles" means, then attempting to takeadvantage of the ambiguity later on.

4. Substitution of Terms. It could be theoretically possible fora contract to be rendered null and void by a court because of a single termwhich a court considers unreasonable. Doing so would be particularly harsh,so in more recent times courts have seen fit to substitute more reasonableterms in place of those which it feels to be outside the limits of fairnessor legality. In the Dr. A/B instance, the court could order that the contractproperly calls for a circular region of non-competition. It could say, however,that the circle's radius must be determined using Dr. A's hospital as thecenter and a point five miles down the curvy road between the two practicesas the outside limit of the non-competition zone.

5. Liquidated Damages. Liquidated damages are a specific provisionin a non-competition agreement which entitle the party seeking to enforcethe agreement to a set amount of money for any violation. The theory behindsuch a provision is that it is too difficult to prove the exact amount offinancial damage a practice would suffer if a party practiced within theproscribed region. Therefore, the parties agree to a specific amount ofmoney which would compensate the aggrieved party should a violation occur.Liquidated damages are a risky term for anyone to include in a non-competitionagreement, and any doctor considering entering into a contract which providesfor liquidated damages should make it a point to seek qualified legal guidanceprior to agreeing to any such term.

In September, I will offer some guidelines for veterinarians to considerin reviewing potential non-competition agreements, both in the context ofselling a practice and in agreeing to work for an employer who requiressuch a term in the employment agreement.